How big a portfolio is needed to become a stock market millionaire? I think it is possible to aim for a million by owning just 10 or less shares.
That may sound surprising. But actually there is a clear logic behind the approach.
What drives outsized returns
Think about the best-performing sports teams in the world. Often, from a potential pool of thousands of players, only a small number make the team. Even then, deep success is often driven by just one or two key team members in any given season.
When it comes to the stock market, a similar principle applies.
To illustrate, imagine that over 10 years I could invest £10,000 in 100 shares with an average compound annual growth rate (CAGR) of 5%, 50 shares with a CAGR of 10%, or just 10 shares with a CAGR of 15%.
After a decade, my £10,000 in 100 shares would be worth £16,289. The 50-share portfolio would be worth £25,937 and the 10-share portfolio would be worth £40,455.
Investing the same total amount each time, what drove that difference in final portfolio value was not the number of shares in each one, but the average return.
By slimming down my portfolio to what I think are the most promising shares to buy and hold, I could hopefully push up my average annual return. I might not, of course, and could lose money as well as making it!
Becoming a stock market millionaire
Still, although quadrupling my money in a decade would be an impressive return, it would still leave me far from reaching my goal.
Fifteen percent might not sound like a very tough average annual return to achieve. Actually though, many investors fall far below that level of performance.
To aim for a million, not only would I need to choose the right few shares for my portfolio, I would also need to be serious about investing enough capital to give myself a realistic chance of hitting the target.
Finding cheap shares to buy
Sticking with my example CAGR of 15%, if I invested £1,000 per month to aim for a million, I should hit my goal in under two decades.
The principle of buying 10 shares makes sense to me. I might even buy fewer, as long as I could keep my portfolio sufficiently diversified. But what sorts of shares might help me achieve that level of compound annual growth rate?
The right growth shares could help. Alphabet and Apple have achieved that sort of growth in some periods in recent years, as have British firms like Judges Scientific. Those shares might not do as well in future, but their track records demonstrate the broader point that growth shares can deliver the sort of gains I need.
What about dividend shares? Some have high yields, but few are close to 15%.
However, they may raise their dividends while I own them. I could also benefit from share price growth. For example, maybe a high-yield share maintains its dividend against City expectations. Not only could I earn big dividends, the shares might also grow in value to reflect the good news.
I believe both growth and income shares could help me aim for a million. I just need to find the right ones!
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Apple, and Judges Scientific Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
(The post is shared from syndication feed, it is not edited by Analyzing Market Team.)